Castro's management of 'free' market is doomed

Hey there, time traveller!This article was published 19/7/2013 (1489 days ago), so information in it may no longer be current.

According to some in Miami, Cuba remains Fidel Castro's island, its economy throttled by the all-too-visible hand of collectivist central planning. News that Cuba loaded Soviet-era missiles on a North Korean ship, apparently for repair by Kim Jong Un's regime, may reinforce that impression. In fact, since Raul Castro took over from his elder brother in 2006, he has moved to dismantle Fidel's system.

One way or another, perhaps 15 per cent to 20 per cent of Cubans now work in the private sector. More are likely to join them in all but name as their jobs move into co-operatives. Much of the spadework for a mixed economy, such as laws on taxes and banking, has been quietly carried out. Reform is about to gain pace, with state enterprises winning more autonomy and steps toward the abolition of Cuba's system of dual currencies.

But change is still being held back -- mostly by the regime's ideology, but also partly by the outside world not helping enough. Raul is determined to avoid a Soviet-style collapse into oligarchic capitalism. The leadership's mantra is that the economy must be "socialist, prosperous and sustainable" -- an impossible trinity. Although officials now accept the need for "wealth creation," they still disapprove of people getting rich. Small businesses are now officially blessed, but they are not allowed to grow into medium-sized ones. Until they are, the prosperity the leadership seeks will be unattainable.

The cautious nature of reform is generating new distortions. Farming, for instance, is supposed to be in the vanguard. Most land is now worked by individual farmers rather than state-owned enterprises, and farmers can sell some produce in the private market. But they are still hobbled by state bodies that fail to supply fertilizer, seed and other inputs. Meanwhile, the web of restrictions around the private sector creates scope for graft. Ironically, the move toward a single currency may involve several exchange rates, and thus fresh distortions and corruption.

Currency and enterprise reform are fiendishly complex and take time. They will inevitably create losers: Both unemployment and inflation will rise. That makes it all the more important to sweep away the remaining curbs on farmers, small businesses and the wholesale trade so market forces can do the work of generating jobs and keeping prices in check. The government should introduce a conditional cash-transfer program, like Brazil's Bolsa Famlia, to help the losers.

The outside world matters, too. The tempo of reform has increased since Hugo Chavez's illness and death: Cuba depends on Venezuela for around 40 per cent of its foreign exchange, provided essentially as a donation to keep the red flag flying, and the future of that aid is now uncertain. Cuba is developing new trading partners -- China, Brazil and Angola, for example -- but on capitalist terms. The missing name is America. Though the United States' economic embargo against Cuba has sprung leaks, it limits Cuban-Americans to being providers of remittances. Diasporas played a crucial role in the transition to capitalism in China and Vietnam. They could help Cuba too. Similarly, swift and clean monetary reform would be much easier if Cuba could draw on support from the International Monetary Fund and the World Bank to augment its meagre foreign-exchange reserves.

One obstacle to that is the United States, where the Helms-Burton law requires America's delegates to vote against Cuba's admission to international financial institutions. That is a pointless piece of bullying. Its only effect is to conspire with Cuba's own residual Stalinists to make the island's transition to capitalism harder and slower than it should be.

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